Special Provisions For Computing Income On Estimated Basis Under Sections 44AD, 44ADA and 44AE

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1. Computation of 'Business Income' On Estimated Basis Under Section 44AD -

2. Computation of 'Professional Income' on Estimated Basis Under Section 44ADA -

3. Computation of Income on Estimated Basis in the case of Business of Plying, Leasing or Hiring Trucks / Goods Carriages [Section 44AE] -

1. Computation of 'Business Income' On Estimated Basis Under Section 44AD -

Section 44AD is applicable if the taxpayer is a resident individual, resident Hindu undivided family or a resident partnership firm (not being a limited liability partnership). The taxpayer should be engaged in any business (but not in the negative list given below). The annual turnover should not exceed Rs. 2 crore. In such a case, income is computed on estimated basis at the rate of 8% (6% See Note) of turnover. The rate of 8 % (6% See Note) is comprehensive (i.e., no further deduction is allowed under any other section, even the deduction of remuneration and interest to partners is not available).

An assessee (who opts for the above scheme) is eligible for the following benefits–

1. He can submit his return of income in ITR-4 (ITR-4 is a simplified form as compared to other forms).

2. He is exempted from maintenance of books of account.

3. He can pay advance tax pertaining to his business income in one instalment (i.e., on or before March 15 of the financial year immediately prior to the assessment year). Other assessees are required to pay advance tax in four instalments (i.e., on or before June 15, September 15, December 15 and March 15 of the financial year immediately prior to the assessment year).

Negative list - The following Persons are Not eligible to avail any benefit under section 44AD –

1. a person carrying on profession as referred to in section 44AA(1);

2. a person earning income in the nature of commission or brokerage;

3. a person carrying on any agency business; or

4. a person who is in the business of plying, hiring or leasing goods carriages;

5. the assessee who has claimed any deduction under sections 10A, 10AA, 10B, 10BA, 80HH to 80RRB in the relevant assessment year.

Is it possible to declare higher income -

A taxpayer who is covered by section 44AD can declare higher income.

Is it possible to declare lower income -

If an assessee declares profit for any previous year under the scheme of section 44AD, he cannot declare lower profit for the next 5 consecutive subsequent assessment years. If he declares lower profit, then he shall not be eligible to claim the benefit of the provisions of section 44AD for 5 subsequent assessment years [i.e., subsequent to the assessment year relevant to the previous year in which the profit has not been declared at the rate of 8 % (6% See Note) ].

Example :

An eligible assessee claims to be taxed on presumptive basis of 8 % (6% See Note) of turnover under section 44AD for assessment year 2018-19. He offers income of Rs. 8 lakh on the turnover of Rs. 1 crore. For assessment year 2019-20 and assessment year 2020-21 also he offers income in accordance with the provisions of section 44AD.

However, for assessment year 2021-22, he offers income of Rs. 4 lakh on turnover of Rs. 1 crore. In this case, since he has not offered income in accordance with the provisions of section 44AD for 5 consecutive assessment years, after assessment year 2018-19, he will not be eligible to claim the benefit of section 44AD for next five assessment years (i.e., for assessment years 2022-23 to 2026-27).

Consequently, for the assessment years 2021-22 to 2026-27,—

1. he will have to maintain the books of account as per section 44AA (irrespective of income or turnover), if his total income exceeds the exemption limit; and

2. he will have to get his books of account audited under section 44AB (irrespective of turnover), if his total income exceeds the exemption limit.

If the taxpayer wants to declare lower income, he cannot submit his return of income in ITR-4 (return can be submitted in ITR-3 or ITR-5).

2. Computation of 'Professional Income' on Estimated Basis Under Section 44ADA -

Section 44ADA is applicable from the assessment year 2017-18. The provisions of section 44ADA are given below -

1. The assessee is resident and engaged in a profession referred to in section 44AA(1) (i.e., such as legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board).

2. Gross receipts of the assessee from the profession does not exceed Rs. 50 lakh.

3. If the above two conditions are satisfied, income of the assessee shall be calculated on estimated basis at a sum equal to 50% of the total gross receipts.

4. The assessee can voluntarily declare a higher income in his return.

5. All deductions under sections 30 to 38, including depreciation and unabsorbed depreciation, are deemed to have been already allowed and no further deduction is allowed under these sections.

6. The written down value is calculated, where necessary, as if depreciation as applicable has been allowed. Moreover, it will be assumed that disallowance, if any, under sections 40, 40A and 43B has been considered while calculating the estimated income @ 50 %.

7. An assessee can declare his income to be lower than the deemed profits and gains as stated above. The following consequences are applicable if the taxpayer declares his income which is lower than the deemed profits and gains as stated above -

   - The assessee will have to maintain the books of account as per section 44AA, if his total income exceeds the exemption limit.

   - The assessee will have to get his books of account audited under section 44AB (irrespective of turnover), if his total income exceeds the exemption limit.

3. Computation of Income on Estimated Basis in the case of Business of Plying, Leasing or Hiring Trucks / Goods Carriages [Section 44AE] -

The broad features of the Section 44AE or Scheme are :

1. Not more than 10 goods carriages -

The scheme applies to a person owning not more than 10 goods carriages at any time during the previous year.

For this purpose, an assessee who is in possession of a goods carriage, whether taken on hire purchase or on instalments and for which the whole or part of the amount payable is still due, shall be deemed to be the owner of such goods carriages. 

2. Mode of Estimation of Income (applicable up to the assessment year 2018-19) -

The income from each goods carriage being a “heavy goods vehicle” shall be estimated at Rs. 7,500 for every month (or part of a month) during which the goods carriage is owned by the assessee.

The income from each goods carriage, other than a heavy goods vehicle shall be estimated at Rs. 7,500 for every month (or part of a month) during which the goods carriage is owned by the assessee.

In either case, the taxpayer can declare his income from trucks at a higher amount than that specified above.

For this purpose “goods carriage” means any motor vehicle constructed or adapted for use solely for the carriage of goods, or any motor vehicle not so constructed or adapted when used for the carriage of goods; and

“heavy goods vehicle” means any goods carriage the gross vehicle weight of which, or a tractor or a roadroller the unladen weight of either of which exceeds 12,000 kilograms.

Example :

Aan assessee owns a commercial vehicle for 8 months and 3 days, a medium goods vehicle for 11 months and a medium goods vehicle for 12 months during the previous year. His profits and gains from three trucks shall be deemed to be (Rs. 7,500 × 9) + (Rs. 7,500 × 11) + (Rs. 7,500 × 12), i.e., Rs. 2,40,000. 

3. Mode of Estimation of Income (applicable from the assessment year 2019-20) -

The mode of estimation of income, as revised with effect from the assessment year 2019-20, is as follows –

(A). Heavy goods vehicle (more than 12,000 kg. gross vehicle weight) -

1. For a heavy goods vehicle, the profits and gains shall be an amount equal to Rs. 1,000 per ton of gross vehicle weight (or unladen weight) for every month (or part of a month) during which the heavy goods vehicle is owned by the assessee in the previous year or

2. an amount claimed to have been actually earned from such vehicle,

   whichever is higher.

(B) Other than heavy goods vehicle -

1. In the case of a goods carriage (other than heavy vehicle), the profits and gains shall be an amount equal to Rs. 7,500 for every month (or part of a month) during which the goods carriage is owned by the assessee in the previous year or

2. an amount claimed to have been actually earned from such goods carriage,

   whichever is higher.

4. No further deduction -

The estimated income is comprehensive. All deductions under sections 30 to 38 including depreciation and unabsorbed depreciation shall be deemed to have been already allowed and no further deduction will be allowed under these sections. However, in the case of a firm, the normal deduction under section 40(b) shall be allowed. The written down value will be calculated, where necessary, as if depreciation as applicable has been allowed.

5. Accounts/audit not required -

The assessee is neither required to maintain books of account under the provisions of section 44AA, nor required to get his accounts audited under the provisions of section 44AB, in respect of his income from truck business.

However, even such an assessee should comply with the requirements of both sections 44AA and 44AB in respect of his businesses which are not covered by this scheme. 

6. Normal provisions applicable for other incomes -

Income from the truck business, estimated in accordance with this provision, is aggregated with other incomes of the assessee, from any other business or under other heads of income, in accordance with the normal provisions of the Act. Accordingly, all deductions under sections 80C to 80U will be available to the assessee, if the conditions therein are fulfilled. 

7. Consequences if lower income is declared -

An assessee may claim his income to be lower than the deemed profits and gains, subject to the condition that the books of account and other documents are kept and maintained as required under section 44AA and the assessee gets his accounts audited irrespective of turnover and furnishes a report of such audit as prescribed under section 44AB.

Topics...on ‘Profits and Gains of Business or Profession’

• APPEALS & REVISIONS - Direct Taxes
• ASSESSMENT - Direct Taxes
• BUSINESS OR PROFESSION - Direct Taxes
• SET OFF or CARRY FORWARD and SET OFF of LOSSES - Direct Taxes
• DEDUCTIONS [Section 80A to 80U Chapter VIA]- Direct Taxes
• CAPITAL GAINS - Direct Taxes
• HOUSE PROPERTY INCOME- Direct Taxes
• INCOME FROM OTHER SOURCES- Direct Taxes
• SALARY INCOME - Direct Taxes
• INCOME TAX BASIC - Direct Taxes
• PENALTIES & PROSECUTIONS - Direct Taxes
• RETURN of INCOMES and PROCEDURE of ASSESSMENT- Direct Taxes
• TDS & TCS - Direct Taxes

• APPEALS & REVISIONS - Direct Taxes
• ASSESSMENT - Direct Taxes
• BUSINESS OR PROFESSION - Direct Taxes
• SET OFF or CARRY FORWARD and SET OFF of LOSSES - Direct Taxes
• DEDUCTIONS [Section 80A to 80U Chapter VIA]- Direct Taxes
• CAPITAL GAINS - Direct Taxes
• HOUSE PROPERTY INCOME- Direct Taxes
• INCOME FROM OTHER SOURCES- Direct Taxes
• SALARY INCOME - Direct Taxes
• INCOME TAX BASIC - Direct Taxes
• PENALTIES & PROSECUTIONS - Direct Taxes
• RETURN of INCOMES and PROCEDURE of ASSESSMENT- Direct Taxes
• TDS & TCS - Direct Taxes